Tesla’s Having Trouble With Model 3 Production

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Tesla announced its quarterly production numbers yesterday and the news is mixed. First, the company managed to increase production of its Model S and Model X vehicles by 4.5 percent compared with last year. Its Model 3 production, however, was markedly below expectations. In Q3, Tesla built 25,390 Model S and Model X vehicles, and just 260 Model 3s. That’s a far cry from where Tesla wanted to be at this point in its ramp up.

Back in May, Tesla declared it wanted to be ramping up to 5,000 Model 3s per week by the end of 2017 and up to 10,000 by the end of 2018. That first goal now looks unlikely. While it’s possible there’s a single component or critical failure point that’s holding total line production back, it’s more likely Tesla has been dealing with a range of issues. Ramping up vehicle production is difficult, which is one reason why so few major car companies have been successfully ramped to compete with the likes of Ford, GM, and Fiat Chrysler.

Tesla didn’t offer much commentary on its problems, saying that Model 3 production was less than anticipated due to production bottlenecks.

“It is important to emphasize that there are no fundamental issues with the Model 3 production or supply chain,” Tesla added. “We understand what needs to be fixed and we are confident of addressing the manufacturing bottleneck issues in the near-term.”

The company is working to resolve these production issues. Production delays are, of course, nothing new to Tesla: The Model S and Model X were both significantly delayed before they finally launched, and the Model 3 is likely no different in that respect. The tricky part will be ramping up production to the sheer number of cars that Musk wants to buy. At 5,000 vehicles per week, which was Musk’s target, Tesla would be delivering 60,000 Model 3s per quarter. Assuming that the company kept its 25,390 quarterly production rate on the Model X and Model S (just to simplify the math), that would add up to 85,390 cars, or ~3.4 times more than Tesla produces today. No matter what you think of Elon Musk and Tesla itself, tripling your rate of production over a single year is an extremely ambitious goal.

Goldman-Sachs responded to the news by predicting Tesla shares will drop 40 percent as a result of the Model 3 delay; Goldman analyst David Tamberrino raised his six-month price target a bit from $ 200 to $ 210. That’s a severe drop compared to the stock’s current value of $ 345. Investors don’t seem to have been phased by the latest news, but Tesla’s value has been criticized by some for being out of proportion to the number of vehicles it sells. Stock price analysis isn’t really ET’s game, but there’s a close intersection here between the technology Musk is deploying, the larger state of the BEV (Battery Electric Vehicle) market, and how confident investors are in Tesla’s ability to execute its roadmap. After years of delays on other vehicles that ultimately resolved and led to higher sustained shipments, investors seem willing to ride out these issues on the Model 3 as well.